Japan's economy shrinks sharply after sales tax rise

Employees of Toyota Motor Kyushu mount an engine into the body of a Lexus NX on an assembly line at the Miyata plant in Fukuoka Prefecture, Japan on August 8, 2014 (AFP Photo/Toru Yamanaka)

Japan's economy suffered its biggest quarterly contraction since the 2011 quake and tsunami as a sales tax rise slammed the brakes on growth, data showed Wednesday, throwing into question plans for another increase next year.

The 1.7 percent dip in gross domestic product for the second quarter -- or a 6.8 percent contraction at an annualised rate -- gave the clearest picture yet of the impact of the levy rise.

The weak figures may force Tokyo to reassess another planned tax increase next year, a move aimed at finding new revenue sources to shrink the massive national debt.

While the April-June figure was slightly better than market expectations, it appeared at odds with the government and Bank of Japan's view that the impact of the rise on the world's number-three economy had been minimal.

Still, Prime Minister Shinzo Abe acknowledged that his administration had some work to do.

"As a government, we're going to analyse it and do our best to bring the economy back on a recovery path," he told reporters.

With the exception of flat growth in the last quarter of 2013, the Wednesday data marked the first quarterly contraction in nearly two years and the biggest since the natural disasters more than three years ago.

"The contraction was within market expectations, but the decline in private consumption was bigger than we thought," Yoko Takeda, chief economist with Mitsubishi Research Institute, told AFP.

"We still see the Japanese economy as being on course for a gradual recovery."

She added that the figures were an "exception" due to the tax increase.

"It is more important to see the July-September quarter," Takeda said.

"That will be the key to predicting the future of the economy, and crucial for making a decision about raising the sales tax again."

- Stimulus measures -

The economy had been on the upswing as Prime Minister Shinzo Abe's growth blitz, dubbed Abenomics, helped sharply weaken the yen, giving a lift to exporters' profitability and driving a stock market rally last year.

A huge monetary easing campaign by the Bank of Japan (BoJ) was a cornerstone of the programme.

But economists warned that the strong growth would take a hit as Tokyo raised its consumption tax to 8.0 percent from 5.0 percent -- the first rise since the late nineties.

Millions of shoppers launched a last-minute buying binge on everything from cars and washing machines to televisions and alcohol, before the April 1 increase.

Activity slowed right after prices went up, with a 5.2 percent drop in household spending during the quarter, a 10.3 percent plunge in real-estate investment, and a 2.5 percent fall in capital spending.

Last week the central bank warned over a worsening export and factory output picture, but it held fire on launching more stimulus measures, saying the economy was recovering.

Bank governor Haruhiko Kuroda has repeatedly said he is ready to go ahead with more stimulus -- similar to the Federal Reserve's quantitative easing -- but last week gave little indication such a move was imminent.

"The BoJ is likely to change its economic outlook downward -- and the market expectation for further monetary accommodation is likely to grow further," Takahiro Sekido, a strategist at the Bank of Tokyo-Mitsubishi UFJ, told Dow Jones Newswires.

It remains unclear if Abe will follow through on a plan to raise the sales tax again to 10 percent, as he faces criticism over the pace of efforts to shake up the highly regulated and protected economy.

Japan's last sales tax rise in 1997 foreshadowed a decline into years of deflation and tepid growth.

But many economists have noted that the circumstances then were different, with the earlier rise coming in the midst of the Asian financial crisis.